Erie Indemnity Reports Full Year and Fourth Quarter 2014 Results

Net Income per Diluted Share is $3.18, up $0.10 for the Year

News provided by

Feb 26, 2015, 04:15 ET

ERIE, Pa., Feb. 26, 2015 /PRNewswire/ -- Erie Indemnity Company (NASDAQ: ERIE) today announced financial results for the full year and the quarter ending December 31, 2014. Net income per diluted share was $3.18 for the full year 2014 compared to $3.08 for 2013. Net income per diluted share in the fourth quarter of 2014 was $0.48 compared to $0.67 in the fourth quarter of 2013.

"ERIE continues to achieve strong results through sound execution of our business strategy and the steadfast commitment of our Agents, Customers and Employees," said Terry Cavanaugh, President and CEO. "As we celebrate our 90^th anniversary in 2015, we are well positioned for continued long-term growth and value creation."

4Q and Total Year 2014 - Results of Indemnity Shareholder Interest
(dollars in millions)	4Q'13	4Q'14	2013	2014
Management operations	$41	$35	$209	$223
Investment operations	13	2	38	28
Income before income taxes	54	37	247	251
Provision for income taxes	18	11	84	83
Net income	$36	$26	$163	$168
Gross margin from management operations	13.2%	10.5%	16.1%	15.8%
Return on equity			23.6%	23.3%

2014 Total Year Highlights

Income from management operations before taxes increased $14 million, or 6.5 percent, in 2014 compared to the prior year.

Revenue from management operations increased $110 million, or 8.5 percent. Direct written premium from the property and casualty insurance operations, upon which the management fee is calculated, increased 8.6 percent for the year due to a 4.3 percent increase in policies in force and a 4.2 percent increase in the year-over-year average premium per policy at December 31, 2014.
Commissions increased $73 million, or 10.3 percent, in 2014 compared to the prior year primarily due to the 8.6 percent increase in direct written premium from the property and casualty insurance operations. Commission growth outpaced direct premium written growth primarily due to an increase in agent incentive costs related to profitable growth.
Non-commission expense increased $23 million, or 6.2 percent, in 2014 compared to 2013. Information technology costs increased $13 million, which included $6 million of professional fees, $4 million of personnel costs, and $3 million of hardware and software costs. Underwriting and policy processing costs increased $7 million due to the increased cost of underwriting reports, postage, and printing costs related to increased volume. Customer service costs increased $4 million due to an increase of $2 million in credit card processing fees and $2 million in personnel costs. All other operating costs decreased $1 million.

Income from investment operations before taxes totaled $28 million in 2014 compared to $38 million in the prior year. Earnings from limited partnerships were $11 million in 2014 compared to earnings of $22 million in 2013.

In 2014, Indemnity returned $119 million to shareholders as dividends and $20 million through share repurchases of Class A nonvoting common stock.

4Q 2014 Highlights

Income from management operations before taxes decreased $6 million, or 13.3 percent, in the fourth quarter of 2014 compared to the fourth quarter of 2013.

Revenue from management operations increased $28 million, or 9.1 percent, in the fourth quarter of 2014 compared to the fourth quarter of 2013.
Commissions increased $24 million, or 13.3 percent, in the fourth quarter of 2014 compared to the fourth quarter of 2013 primarily due to the 9.0 percent increase in direct written premium from the property and casualty insurance operations. Commission growth outpaced direct premium written growth primarily due to an increase in agent incentive costs related to profitable growth.
Non-commission expense increased $10 million, or 11.1 percent, in the fourth quarter of 2014 compared to the fourth quarter of 2013. Administrative and other costs increased $5 million in the quarter, primarily due to increased costs associated with the long term incentive plan and the Director's deferred compensation plan. These plans include a component based on Indemnity share price and the share price increased substantially during the fourth quarter of 2014. Additionally, certain employee incentive plan costs increased due to the improved underwriting results in the quarter. Information technology costs increased $3 million, which included a $1 million increase in professional fees, personnel costs and hardware and software costs. All other operating costs increased $2 million.

Income from investment operations before taxes totaled $2 million in the fourth quarter of 2014, compared to $13 million in the fourth quarter of 2013. Losses from limited partnerships were $2 million in the fourth quarter of 2014 compared to earnings of $9 million in the fourth quarter of 2013.

Webcast Information

Indemnity has scheduled a conference call and live audio broadcast on the Web for 10:00 AM ET on February 27, 2015. Investors may access the live audio broadcast by logging on to www.erieinsurance.com. Indemnity recommends visiting the website at least 15 minutes prior to the Webcast to download and install any necessary software. A Webcast audio replay will be available on the Investor Relations page of the Erie Insurance Group's website by 12:30 PM ET.

About the Erie Insurance Group

According to A.M. Best Company, Erie Insurance Group, based in Erie, Pennsylvania, is the 11^th largest homeowners insurer and 12^th largest automobile insurer in the United States based on direct premiums written and the 16^th largest property/casualty insurer in the United States based on total lines net premium written. The Group, rated A+ (Superior) by A.M. Best Company, has nearly 5.0 million policies in force and operates in 12 states and the District of Columbia. Erie Insurance Group is a FORTUNE 500 and Barron's 500 company. Erie Insurance is proud to have received the J.D. Power award for "Highest in Customer Satisfaction with the Auto Insurance Purchase Experience" two years in a row. ERIE has also been recognized by Forbes as one of America's 50 Most Trustworthy Financial Companies and is on the list of Ward's 50 Group of top performing insurance companies, which analyzes the financial performance of 3,000 property and casualty companies and recognizes the top performers for achieving outstanding results in safety, consistency and financial performance over a five-year period (2009-2013).

News releases and more information about Erie Insurance Group are available at www.erieinsurance.com.

***

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995:
Statements contained herein that are not historical fact are forward-looking statements and, as such, are subject to risks and uncertainties that could cause actual events and results to differ, perhaps materially, from those discussed herein. Forward-looking statements relate to future trends, events or results and include, without limitation, statements and assumptions on which such statements are based that are related to our plans, strategies, objectives, expectations, intentions and adequacy of resources. Examples of forward-looking statements are discussions relating to premium and investment income, expenses, operating results, agency relationships, and compliance with contractual and regulatory requirements. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements.

Among the risks and uncertainties, in addition to those set forth in our filings with the Securities and Exchange Commission, that could cause actual results and future events to differ from those set forth or contemplated in the forward-looking statements include the following:

Risk factors related to the Indemnity shareholder interest:

dependence on Indemnity's relationship with the Exchange and the management fee under the agreement with the subscribers at the Exchange;
costs of providing services to the Exchange under the subscriber's agreement;
ability to attract and retain talented management and employees;
ability to maintain uninterrupted business operations;
factors affecting the quality and liquidity of Indemnity's investment portfolio;
credit risk from the Exchange;
Indemnity's ability to meet liquidity needs and access capital; and
outcome of pending and potential litigation.

Risk factors related to the non-controlling interest owned by the Exchange, which includes the Property and Casualty Group and EFL:

general business and economic conditions;
dependence upon the independent agency system;
ability to maintain our reputation for customer service;
factors affecting insurance industry competition;
changes in government regulation of the insurance industry;
premium rates and reserves must be established from forecasts of ultimate costs;
emerging claims, coverage issues in the industry, and changes in reserve estimates related to the property and casualty business;
changes in reserve estimates related to the life business;
severe weather conditions or other catastrophic losses, including terrorism and pandemic events;
the Exchange's ability to acquire reinsurance coverage and collectability from reinsurers;
factors affecting the quality and liquidity of the Exchange's investment portfolio;
the Exchange's ability to meet liquidity needs and access capital;
the Exchange's ability to maintain acceptable financial strength ratings;
outcome of pending and potential litigation; and
dependence upon the service provided by Indemnity.

A forward-looking statement speaks only as of the date on which it is made and reflects Indemnity's analysis only as of that date. Indemnity undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changes in assumptions, or otherwise.

(ERIE-F)

Erie Indemnity Company
Consolidated Statements of Operations
(dollars in millions, except per share data)


	Three months ended December 31,				Twelve months ended December 31,
	2014		2013		2014		2013
Revenues	(Unaudited)
Premiums earned	$	1,382	$	1,267	$	5,344	$	4,898
Net investment income	111		106		446		422
Net realized investment gains	89		270		193		771
Net impairment losses recognized in earnings	(3)		(3)		(4)		(13)
Equity in earnings of limited partnerships	2		49		113		161
Other income	8		8		32		32
Total revenues	1,589		1,697		6,124		6,271
Benefits and expenses
Insurance losses and loss expenses	863		896		3,958		3,467
Policy acquisition and underwriting expenses	349		331		1,336		1,237
Total benefits and expenses	1,212		1,227		5,294		4,704

Income from operations before income taxes and noncontrolling interest	377		470		830		1,567
Provision for income taxes	124		156		257		519
Net income	$	253	$	314	$	573	$	1,048

Less: Net income attributable to noncontrolling interest in consolidated entity – Exchange	227		278		405		885

Net income attributable to Indemnity	$	26	$	36	$	168	$	163


Earnings Per Share
Net income attributable to Indemnity per share
Class A common stock – basic	$	0.54	$	0.75	$	3.59	$	3.46
Class A common stock – diluted	$	0.48	$	0.67	$	3.18	$	3.08
Class B common stock – basic	$	81	$	113	$	539	$	520
Class B common stock – diluted	$	81	$	113	$	538	$	519

Weighted average shares outstanding attributable to Indemnity – Basic
Class A common stock	46,189,068		46,520,232		46,247,876		46,660,651
Class B common stock	2,542		2,542		2,542		2,542

Weighted average shares outstanding attributable to Indemnity – Diluted
Class A common stock	52,601,010		52,715,338		52,616,234		52,855,757
Class B common stock	2,542		2,542		2,542		2,542

Dividends declared per share
Class A common stock	$	0.6810	$	0.6350	$	2.5860	$	2.4125
Class B common stock	$	102.1500	$	95.2500	$	387.9000	$	361.8750

Erie Indemnity Company
Results of the Erie Insurance Group's Operations by Interest (Unaudited)
(in millions)

	Indemnity shareholder interest				Noncontrolling interest (Exchange)				Eliminations of related party transactions				Erie Insurance Group
	Three months ended December 31,				Three months ended December 31,				Three months ended December 31,				Three months ended December 31,
	2014		2013		2014		2013		2014		2013		2014		2013
Management operations:
Management fee revenue, net	$	329	$	301	$	—	$	—	$	(329)	$	(301)	$	—	$	—
Service agreement revenue	8		8		—		—		—		—		8		8
Total revenue from management operations	337		309		—		—		(329)		(301)		8		8
Cost of management operations	302		268		—		—		(302)		(268)		—		—
*Income from management operations before taxes*	35		41		—		—		(27)		(33)		8		8
Property and casualty insurance operations:
Net premiums earned	—		—		1,361		1,247		—		—		1,361		1,247
Losses and loss expenses	—		—		843		870		(2)		(1)		841		869
Policy acquisition and underwriting expenses	—		—		370		355		(31)		(36)		339		319
*Income from property and casualty insurance operations before taxes*	—		—		148		22		33		37		181		59
Life insurance operations: ⁽¹⁾
Total revenue	—		—		48		53		(1)		0		47		53
Total benefits and expenses	—		—		32		39		0		0		32		39
*Income from life insurance operations before taxes*	—		—		16		14		(1)		0		15		14
Investment operations: ⁽¹⁾
Net investment income	4		4		87		82		(5)		(4)		86		82
Net realized gains on investments	0		0		88		261		—		—		88		261
Net impairment losses recognized in earnings	0		0		(3)		(3)		—		—		(3)		(3)
Equity in (losses) earnings of limited partnerships	(2)		9		4		40		—		—		2		49
*Income from investment operations before taxes*	2		13		176		380		(5)		(4)		173		389
Income from operations before income taxes and noncontrolling interest	37		54		340		416		—		—		377		470
Provision for income taxes	11		18		113		138		—		—		124		156
Net income	$	26	$	36	$	227	$	278	$	—	$	—	$	253	$	314

(1) Earnings on life insurance related invested assets are integral to the evaluation of the life insurance operations because of the long duration of life products. On that basis, for presentation purposes, the life insurance operations in the table above include life insurance related investment results.

Erie Indemnity Company
Results of the Erie Insurance Group's Operations by Interest
(in millions)

	Indemnity shareholder interest				Noncontrolling interest (Exchange)				Eliminations of related party transactions				Erie Insurance Group
	Twelve months ended December 31,				Twelve months ended December 31,				Twelve months ended December 31,				Twelve months ended December 31,
	2014		2013		2014		2013		2014		2013		2014		2013
Management operations:
Management fee revenue, net	$	1,376	$	1,266	$	—	$	—	$	(1,376)	$	(1,266)	$	—	$	—
Service agreement revenue	31		31		—		—		—		—		31		31
Total revenue from management operations	1,407		1,297		—		—		(1,376)		(1,266)		31		31
Cost of management operations	1,184		1,088		—		—		(1,184)		(1,088)		—		—
*Income from management operations before taxes*	223		209		—		—		(192)		(178)		31		31
Property and casualty insurance operations:
Net premiums earned	—		—		5,260		4,820		—		—		5,260		4,820
Losses and loss expenses	—		—		3,859		3,365		(6)		(5)		3,853		3,360
Policy acquisition and underwriting expenses	—		—		1,502		1,387		(204)		(187)		1,298		1,200
*(Loss) income from property and casualty insurance operations before taxes*	—		—		(101)		68		210		192		109		260
Life insurance operations: ⁽¹⁾
Total revenue	—		—		192		192		(2)		(2)		190		190
Total benefits and expenses	—		—		143		144		0		0		143		144
*Income from life insurance operations before taxes*	—		—		49		48		(2)		(2)		47		46
Investment operations: ⁽¹⁾
Net investment income	16		15		350		325		(16)		(12)		350		328
Net realized gains on investments	1		1		183		753		—		—		184		754
Net impairment losses recognized in earnings	0		0		(3)		(12)		—		—		(3)		(12)
Equity in earnings of limited partnerships	11		22		101		138		—		—		112		160
*Income from investment operations before taxes*	28		38		631		1,204		(16)		(12)		643		1,230
Income from operations before income taxes and noncontrolling interest	251		247		579		1,320		—		—		830		1,567
Provision for income taxes	83		84		174		435		—		—		257		519
Net income	$	168	$	163	$	405	$	885	$	—	$	—	$	573	$	1,048

(1) Earnings on life insurance related invested assets are integral to the evaluation of the life insurance operations because of the long duration of life products. On that basis, for presentation purposes, the life insurance operations in the table above include life insurance related investment results.

Erie Indemnity Company
Reconciliation of Operating Income to Net Income

Reconciliation of operating income to net income

We disclose operating income, a non-GAAP financial measure, to enhance our investors' understanding of our performance related to the Indemnity shareholder interest. Our method of calculating this measure may differ from those used by other companies, and therefore comparability may be limited.

Indemnity defines operating income as net income excluding realized capital gains and losses, impairment losses and related federal income taxes.

Indemnity uses operating income to evaluate the results of its operations. It reveals trends that may be obscured by the net effects of realized capital gains and losses including impairment losses. Realized capital gains and losses, including impairment losses, may vary significantly between periods and are generally driven by business decisions and economic developments such as capital market conditions which are not related to our ongoing operations. We are aware that the price to earnings multiple commonly used by investors as a forward-looking valuation technique uses operating income as the denominator. Operating income should not be considered as a substitute for net income prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and does not reflect Indemnity's overall profitability.

The following table reconciles operating income and net income for the Indemnity shareholder interest:

	Indemnity Shareholder Interest
	Three months ended December 31,				Twelve months ended December 31,
(in millions, except per share data)	2014		2013		2014		2013
	(Unaudited)
Operating income attributable to Indemnity	$	26	$	36	$	167	$	162
Net realized gains and impairments on investments	0		0		1		1
Income tax expense	0		0		0		0
Realized gains and impairments, net of income taxes	0		0		1		1
Net income attributable to Indemnity	$	26	$	36	$	168	$	163

Per Indemnity Class A common share-diluted:
Operating income attributable to Indemnity	$	0.48	$	0.67	$	3.17	$	3.07
Net realized gains and impairments on investments	0.00		0.00		0.02		0.01
Income tax expense	0.00		0.00		(0.01)		0.00
Realized gains and impairments, net of income taxes	0.00		0.00		0.01		0.01
Net income attributable to Indemnity	$	0.48	$	0.67	$	3.18	$	3.08

Erie Indemnity Company
Consolidated Statements of Financial Position
(in millions)

	December 31, 2014		December 31, 2013

Assets
Investments – Indemnity
Available-for-sale securities, at fair value:
Fixed maturities	$	564	$	526
Equity securities	25		50
Limited partnerships	113		146
Other invested assets	1		1
Investments – Exchange
Available-for-sale securities, at fair value:
Fixed maturities	9,007		8,162
Equity securities	850		819
Trading securities, at fair value	3,223		3,202
Limited partnerships	866		940
Other invested assets	20		20
Total investments	14,669		13,866

Cash and cash equivalents (Exchange portion of $422 and $403, respectively)	514		452
Premiums receivable from policyholders – Exchange	1,281		1,167
Reinsurance recoverable – Exchange	161		172
Deferred income taxes – Indemnity	37		2
Deferred acquisition costs – Exchange	595		566
Other assets (Exchange portion of $374 and $337, respectively)	501		451
Total assets	$	17,758	$	16,676

Liabilities and shareholders' equity
Liabilities
Indemnity liabilities
Other liabilities	$	611	$	476
Exchange liabilities
Losses and loss expense reserves	3,853		3,747
Life policy and deposit contract reserves	1,812		1,758
Unearned premiums	2,834		2,598
Deferred income taxes	490		450
Other liabilities	175		97
Total liabilities	9,775		9,126

Indemnity's shareholders' equity	703		734

Noncontrolling interest in consolidated entity – Exchange	7,280		6,816
Total equity	7,983		7,550
Total liabilities, shareholders' equity and noncontrolling interest	$	17,758	$	16,676